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3 November, 16:31

A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $8 and takes two machine hours to make and Product B has a unit contribution margin of $18.0 and takes three machine hours to make. If there are 5000 machine hours available to manufacture a product, income will be:

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  1. 3 November, 16:48
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    Income = $30,000

    Explanation

    Whenever a company is faced with a limiting factor i. e a resource in short supply, the company should allocate the resource to the product with he highest contribution per unit of the scare resource

    Product Cont/unit machine hr / unit cont/hr Ranking

    A $8 2 hrs $4/hr 2nd

    B $18 3 hrs $6/hr 1st

    Hence the company should allocate the resource to the product B

    Hence the total contribution

    = 5000 hrs * $6 per hr.

    = $30,000

    Income = $30,000
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